Caterpillar Provides A Good Entry Point Into The Construction And Mining Industry

The economic bellwether, Caterpillar (NYSE:CAT), reported its best ever third quarter sales and profit since its inception. However, the stock plummeted 3% pre-market, as the largest manufacturer of construction and mining equipment missed on the revenue estimate. Not only that, the company also announced that it expected the global economy to slow down in the coming years, with sales growth for 2013 to be the slowest in four years. The company also lowered the 2012 FY outlook. The EPS estimate was reduced from $9.6 to $9-9.25. The revenue estimates were slashed from $68-$70 billion to $66 billion.

The stock is now up 20 bps for the day.

Earnings Release

The company missed the revenue estimate by $340 million. In addition to slashing the earnings and revenue outlook for 2012, the company also announced that it predicted the sales for 2013 to be around up 5% YoY. Earlier, the sell side expected the company to make $70.86 billion. The company now expects sales to be around the $62.7-$69.7 billion mark. The awkward breadth of the estimate shows the confusion and uncertainty that prevails in the market.

The company has already slashed its EPS outlook for 2015. CAT, during the recent MinExpo, slashed its EPS estimate from $15-$20 to $12-$18 for 2015; declining mining CAPEX and weak economic markets in China and Australia were cited as the main reasons.

When the company made the announcement, it was criticized for announcing the outlook for three years ahead in an economic environment so uncertain that companies do not know what is going to happen in the next six months.

Currently, the biggest concern for the company is declining orders. The orders backlog fell 18% QoQ to $23.1 billion. The most declines in orders were in the resource-industries segment, which accounts for 31% of the company's revenues; mining comes under the same segment. The company was already cautious at the MinExpo with regards to the near future of the Mining Industry. According to a JP Morgan analyst, the Mining Industry is at its peak, with $136 billion invested in it. A downward movement is expected now, with an estimated 14% decline in the mining CAPEX through 2014. The situation has become alarming considering that CAT dealers have lowered order rates to well below end-user demand, in order to reduce the excess stock of CAT machinery. As a result, CAT has cut production levels and enforced a temporary shutdown in order to reduce inventory levels, and it will only return to the same momentum of production once it is sure that end demand is rising.

On a global scale, CAT has been facing hurdles in the form of an economic slowdown that has kept it from achieving its goals. Its global retail machines growth slowed to 6 percent in the last quarter due to the economic slowdown in Latin America, Europe, Middle East and Africa

China, where CAT decided to go big, has not provided a healthy environment for the company to bloom. The company currently has only 3% of its overall sales coming from that region. China's growth rate of 7.4% last quarter was the worst since 2009. When asked about its prospects in China, the company's management replied that improvement in Chinese sales has been below expectations. However, on a positive note, the company has done better than the overall excavator industry in China in terms of excavator sales. The company also remains bullish on Brazil, saying that dealer deliveries of new machines to end users were higher than the third quarter of last year.

Conclusion

The company is currently trading at a forward multiple of 8x, which is much lower than the industry's P/E of 11x. The current economic environment is not very encouraging for investors. However, at the same time, it has offered investors a good entry point in the stock, to benefit from the long-term growth that the stock is expected to achieve. Although results have been below expectations, the improvement in sales and earnings is positive YoY. The Construction and Mining industry is an evergreen field. The acquisitions of Bucyrus, MWM and Siwei are turning out well. Therefore, the stock is recommended as a buy. The stock offers a dividend yield of 2.5% as well.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Qineqt's Industrials Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.

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